On Monday May 7, the California Supreme Court confirmed, in Naranjo v. Spectrum Securities Services, Inc., S279397.PDF (ca.gov), that penalties authorized under Labor Code Section 226 (“Section 226”) for “knowing and intentional” failure to furnish accurate wage statements cannot be imposed on employers that “reasonably and in good faith believed” that they issued compliant wage statements.

Section 226 requires employers to provide “accurate itemized” wage statements that include a variety of details, including an employee’s hours worked, wages earned, premium pay for missed meal periods, hourly rates, employer- and employee-identifying information, and more. Failure to do so can have costly consequences for employers—including, civil penalties of up to $4,000 per employee where such failure was “knowing and intentional.”

Until Monday, state and federal courts had split on what exactly qualified as a “knowing and intentional” failure, with some courts only excusing Section 226 penalties where the failure was due to clerical errors or technical glitches. Critically, the Naranjo opinion rejects Plaintiff-Petitioner’s argument that whether an employer knew or should have known what the law required is irrelevant in determining whether the failure was knowing and intentional.

Instead, the Court held that “an employer’s good faith belief it is not violating the California Labor Code precludes a finding of a knowing and intentional violation”, such that Section 226 penalties would be triggered. Specifically, the Court found that the employer’s failure to include premium pay for missed meal periods on employee wage statements was not “knowing and intentional” based on, among other things, testimony that the employer did not know that, as a federal security contractor, it was required to pay premiums for missed meal periods to California workers and an unsettled question of whether such premiums were required to be reported as wages earned on pay statements.

Why it Matters

While ignorance of the law is not generally an excuse, the Court expressed that allowing a good faith defense “amply serves the balance” between incentivizing employers to furnish accurate wage statements and “shielding innocent mistakes from penalties.”  This is a win for employers that may both limit damages awards and provide much-need relief in actions brought under California Private Attorney Generals Act (“PAGA”) down the line.